Yancoal next among Hockey’s hard calls

When the dust settles on federal Treasurer
Joe Hockey
’s shock decision to reject a foreign take­over of
GrainCorp
, attention will turn to a string of other potentially contentious deals awaiting the federal government’s approval.

At the top of the list is a push by China’s Yanzhou to privatise the Australian coal operations it acquired four years ago.

It is a complex proposal which hinges on the government allowing the state-owned Chinese firm to effectively rewrite history and lift restrictions on the ownership of those significant NSW and Queensland mines which come under the banner of
Yancoal Australia
.

Behind the scenes, things are not going well. Relations between Yancoal and its parent have been tense for a long time.

The clock is ticking for Yanzhou, which is a month away from being forced to sell an 8 per cent stake in Yancoal to meet a requirement to keep 30 per cent of the Australian coal business in local hands by the end of calendar 2013.
Photo: Peter Rae

Add Yancoal’s independent directors and minority shareholders – led by Hong Kong commodities trader Noble Group – into the mix and things are more complicated. No one can see eye to eye and the Chinese parent is said to be slow at engaging with the stakeholders to try to resolve the issue.

Noble is understandably opposed to the idea of Yanzhou buying out the minorities while the share price is weak due to falling coal prices.

Yancoal’s independent directors have not yet made a recommendation on Yanzhou’s proposal, as they do not believe there is a solid transaction to consider at the moment.

Meanwhile, management at Yanzhou has been distracted by other issues and lost focus on resolving the ownership issues with its Australian business.

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While there was a meeting with the Foreign Investment Review Board earlier this month, it is understood engagement has been minimal.

Extension of sale deadline likely

The clock is now ticking for Yanzhou.

It is a month away from being forced to sell an 8 per cent stake in the company to meet a requirement to keep 30 per cent of the Australian coal business in local hands by the end of calendar 2013.

The December 31 deadline is part of conditions imposed in 2009 when Yanzhou acquired Felix Resources for $3.5 billion during a period of heightened sensitivity around Chinese companies buying up Australian miners. Yanzhou last year acquired Australia’s Gloucester Coal and merged it with Yancoal.

Yancoal, which is one of Australia’s biggest coalminers and operates seven mines in NSW and Queensland, wants to overturn the conditions imposed four years ago and be allowed to buy the remaining 22 per cent of the company it does not already own, moving to full privatisation.

This is a request before FIRB, which then makes a recommendation to the Treasurer. While a decision has not been made, a likely scenario is that Yanzhou will be granted an extension beyond December 31 to give the shareholders more time to find a solution.

The GrainCorp decision on Friday should not have any direct implications for the Yancoal situation, as Hockey has made it clear each case will be judged on its merits.

But observers believe it has made the situation more unpredictable. Investment bankers and corporate advisers say any proposal before FIRB now has a question mark hanging over it, as there is no way to guarantee which way the government will respond.

China is putting a lot of pressure on Prime Minister
Tony Abbott
at the moment to approve a string of deals in Australia involving its state-owned enterprises.

China’s State Grid is waiting on approval for a $7 billion acquisition of local utility assets, while Chinese-owned Citic Pacific is seeking relief from a royalty dispute with
Clive Palmer
involving its $7 billion Sino Iron project in the Pilbara. There were rumours last week that the Coalition will grant Yanzhou an exemption from its obligations, and the government may see wisdom in granting an extension to give the parties more time to work on alternatives.

Shareholder opposes privatisation

While the independent directors may prefer a short extension period to put pressure on Yanzhou to sort out its issues, Noble wants the government to reject the idea outright and force the sale of 8 per cent by the end of the year.

Noble has a 13 per cent stake in Yancoal and believes Yanzhou’s plan undervalues the company.

This means the Chinese parent, which holds a 78 per cent stake in Yancoal, would have to sell off 8 per cent of the company at a difficult time. Yancoal shares closed on Friday at 70¢, valuing Yanzhou’s share at about $150 million.

Yancoal listed on the Australian Securities Exchange in 2012 at $1.53 per share. The stock has fallen 30 per cent so far this year.

Noble will argue that the move breaches terms and conditions agreed to by Gloucester Coal when it was taken over by Yancoal in 2012. It is opposed to an extension being granted on the grounds that further delays disadvantage minority shareholders due to the stock’s illiquidity.

Others say this is posturing, as the Corporations Act 2001 contains provisions to protect minority shareholders and they get to vote on the privatisation plan anyway. Yancoal’s shareholders could look at legal action if they felt they were being hard done by and forced to sell out while the share price was subdued.

While the Chinese are in one corner, pushing for as long an extension as possible, Noble is in the other corner pressuring the Abbott government not to cave in to Chinese pressure and to stick by obligations entered into three years ago.

Noble is also understood to have put a counter-proposal to Yanzhou which suggests an alternative to privatisation while offering it a way to meet the FIRB obligations. However, the Chinese are said to be stubbornly refusing to engage with Noble on that proposal, as it would prefer the government to grant it an extension.

There have also been suggestions it could look at selling down its Yancoal stake to 70 per cent to other Asian investors, although that could still involve extending the deadline.

Management changes inspire hope

A number of management changes at Yancoal earlier this year were hoped to help pave the way for a resolution to old rivalries. Yancoal appointed a new boss, former Xstrata executive
Reinhold Schmidt
, after posting a $750 million half-year loss in August. Schmidt is said to be a top operator and the minority shareholders’ current frustrations focused on Yanzhou management.

Cultural clashes and some abrasive exchanges between the parties, particularly under Schmidt’s predecessor,
Murray Bailey
, are understood not to have helped.

Yancoal also this year appointed
Li Xiyong
, chairman of Yanzhou Coal Mining Group, as chairman. He succeeded
Wiemen Li
, who resigned from the role in July.

One of Yanzhou’s mistakes was over-confidence that the former Labor government would have approved privatisation. Yancoal co-vice chairman
James MacKenzie
, one of four independent directors brought in from Gloucester, has connections to the Labor Party.

It also failed to see the urgency in tackling the issue and be mindful of the diplomacy that must be adopted when dealing with government agencies like FIRB.

With the deadline fast approaching, though, lobbying is intensifying and Yanzhou will be arguing its case on the basis that FIRB must give it the flexibility to come up with a solution that will be in Australia’s national interest. Additional investment from a Chinese company with deep pockets, the potential to create more jobs and its strong position with technology are merits it will use to argue its case.

Privatisation would also resolve the issues dogging the company which have made it an unattractive investment for Australian funds. It could also address the lack of liquidity, high debt, and tensions between local management and the Chinese-controlled board. But the minority shareholders’ rights also need to be observed.

Also at the heart of the privatisation plan was the issue of converting Yancoal’s contingent value rights, which were part of its initial deal with Gloucester Coal. That has been resolved, with the parent company agreeing this month to pay them out in cash.

With the GrainCorp decision out of the way, Yancoal will be the next big foreign investment test for FIRB and the Abbott ­government.